Many people are aware that when the owner of a taxable asset
passes away, the party that inherits that asset do so at a stepped-up cost
basis. For example, suppose a husband owns a stock in a taxable investment
account that he purchased for $100,000 but is now worth $150,000. If the
husband sells the stock, there will be taxes due on the $50,000 of growth, or
the difference between the current value and the cost basis. However, if the
husband passes away and a wife inherits the stock, the wife’s cost basis gets
increased to the full $150,000, the value of the account on the date the
husband passed away. This enables the wife to sell the stock and keep the full
$150,000 of value without paying taxes.
However, what happens to assets that are owned jointly with
a right of survivorship when one spouse passes away? Did you know in this
scenario, it is possible for assets to receive a ½ step-up in basis? The
formula looks like this:
(Date-of-death fair
market value + Old basis) / 2 = New Basis
In a practical example, suppose John contributes $10,000 to
a joint account with a right of survivorship and Jane contributed $5,000 to the
same account. When John passes, the account is valued at $20,000. This will
cause Jane to get a step-up in basis to $17,500 on the taxable account.
($20,000 + $15,000) /
2 = $17,500
Jane receives a ½ step-up in basis on each position within
the investment account. She is unable to claim a full-step up on one stock
within the account and no step-up on other assets.
Notice that even though the spouse’s contributed different
amounts to the account, they each share a full 50% share of the property for
inclusion in their estates. However, this is unique to spouses with right of
survivorship and the issue is more complex if the parties involved are not
married.
To be clear, this step-up only occurs on taxable assets like
physical property or taxable investment accounts. A step-up does not occur on
tax-deferred investments like IRAs or 401(k)s.
2 comments:
The transfer of assets after a passing is such a confusing topic, so thank you for explaining it thoroughly and clearly. My husband and I are planning our estate right now. As part of the planning, we've considered hiring a financial counselor to help me makes sure that we are getting the most out of our money. Do you have any advice or recommendations. http://www.financialguidancecenter.org/financial_counseling.php
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